Democratic Underground - Ship Rates Plunge as Credit Freeze Strands Cargo, Demand Slumps

Ship Rates Plunge as Credit Freeze Strands Cargo, Demand Slumps

By Alaric Nightingale and Chan Sue Ling

Oct. 15 (Bloomberg) -- Commodity shipping rates plunged to the lowest in more than five years as a lack of trade finance left cargoes stranded and the global economic slowdown limited raw material demand.

Traders are finding it harder to get letters of credit that guarantee payments for goods, shipping executives said. Together with a slowdown in trade, that has contributed to this year's 82 percent drop in shipping costs for grain, coal and other commodities. Rates are so low that Zodiac Maritime Agencies Ltd., the line managed by Israel's billionaire Ofer family, announced today it may idle 20 of its largest ships.

``Letters of credit and the credit lines for trade currently are frozen,'' Khalid Hashim, managing director of Precious Shipping Pcl, Thailand's second-largest shipping company, said in Singapore yesterday. ``Nothing is moving because the trader doesn't want to take the risk of putting cargo on the boat and finding that nobody can pay.''

-more at link-

http://www.bloomberg.com/apps/news?pid=20601087&sid=alFFUQ8a.WZM&refer=home

Edited to add a bit more in the way of explanation:

Shipping prices are plunging - because demand for shipping raw materials is drying up - because of the frozen credit market.

Excerpt from a good explanation of the Baltic Dry Index (BDI) at slate.com (link: http://www.slate.com/id/2090303/)

The BDI is a good leading indicator for economic growth and production. After all, it doesn't deal with container ships carrying finished goods. It deals with the precursors to production: bulk carriers carrying building materials, cement, grain, coal, and iron. Unlike stock and bond markets, the BDI "is totally devoid of speculative content," says Howard Simons, an economist and columnist at TheStreet.com. People don't book freighters unless they have cargo to move.

Because the supply of cargo ships is generally both tight and inelastic—it takes two years to build a new ship, and ships are too expensive to take out of circulation the way airlines park unneeded jets in the Arizona desert—marginal increases in demand can push the index higher quickly. And significant increases in demand can push the index sharply higher.

The linked article was written at a time when shipping prices were increasing (due to fixed supply and increased demand). Now we are seeing the reverse - fixed supply and decreased demand. The decreased demand has come from the unwillingness of lenders to extend credit to anyone. The goods are there to ship, the demand for the goods is there on the receiving end, but since no one is guaranteed payment - the goods sit at the source, and the ships remain idle.

Here's a chart showing how the BDI has tanked in recent weeks:

Which point in your bailout addressed this, Hank? :shrug:

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Ship Rates Plunge as Credit Freeze Strands Cargo, Demand Slumps